There is no shortage of strategists and investors who will tell you that stocks are cheap right now. While factually true and historically accurate, like many things in life, there's a lot more to the story than just the headline.
For Doug Kass, President and Founder of Seabreeze Partners, a truer headline would read, "stocks are theoretically cheap." It is a seemingly small quantification but nonetheless one that acknowledges the historically low price-to-earnings ratio is currently low for a reason. And according to Kass, that reason is a swirl of domestic, global, economic, and political headwinds.
"You have to respect the advance and be mindful that the market has limited upside opportunity," Kass says in the attached video. "There are so many structural issues that face our domestic economy; the Eurozone, issues about whether China is going to have a hard or soft landing, they all impact valuations."
Kass' Most Crowded Trades
This, from the man who a week ago wrote that the "most crowded trade" was being out of the market, right before a flood of money came rushing back in, fueling the market's current rally. Interestingly, on Tuesday Kass wrote on Twitter that he was cutting his long exposure to the stock market to 50% from 70%, in a move of classic contrarianism.
This week Kass told an audience at the Big Picture Conference at the New York Athletic Club that the most crowded trades are Apple (AAPL) and Gold (GLD). He said gold is a lot like religion, "either you believe in God or you're an atheist. The same applies to gold." He believes that gold prices are entirely sentiment driven, and therefore, impossible for him to value.
As for technical analysis, Kass calls that "voodoo" and doesn't buy into market seasonality theories like a year-end Santa Claus rally or "sell in May and go away." Instead, he is trying to assess how much of a reduction to 2012 earnings estimates has already been digested by the market. He's also waiting for the financial sector to "awaken from the dead," like they did in 2009, to suggest a real turnaround in the markets.
The Surprising Sector Kass Likes Now
"It seems to me the lifeblood of our economy is our financial companies, particularly our money center banks. Without them, it's hard to have confidence about the future," Kass says. Even though he calls banks "the pinatas of populism," he's excited about another financial sub-industry: Insurance companies.
"People want guaranteed products," Kass says. "If you look at companies like Prudential (PRU) and MetLife (MET) and Hartford (HIG) and Lincoln National (LNC) their annuity business is going great guns. MetLife's annuity sales were up 40% in the 2nd quarter."
Along that line, Kass admits it's "very hard to form contrarian views right now" since stocks are all moving together in the same direction. So rather than buying and holding, he says people have turned to opportunistically trading to achieve superior returns, a change that has unfortunately brought with it its own set of problems, particularly volatility.